Scientific and Economic Diplomacy: A Pressing Agenda

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By: Ferry Akbar Pasaribu

This week, every Indonesian ambassador from across the world will gather in Jakarta for consultative meetings with various senior government officials, including the President himself.

One of the main agenda items to be discussed during the meetings is how to optimize the use of economic diplomacy for the acceleration of Indonesian development.

The government hopes to see Indonesia evolve as the 12th biggest economy in the world by 2025 by implementing its planned economic development strategy and programs to boost domestic growth and regional connectivity.

This was revealed in the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), aimed at developing infrastructure in six priority regions across the country.

This plan so far has been in line with what happened after the Asian economic crisis in 1997-1998. If we look at various reports by several international organizations and banking institutions we see that having so far weathered the global financial crisis the outlook for the Indonesian economy is promising.

In 2011, its full-year growth stood at 6.5 percent, more than half of which was driven by strong household consumption and capital investment. Investments are lured by a huge domestic demand from the expanding middle class.

The recent upgrade in Indonesia’s credit ratings to investment grade by Moody’s Investors Service and Fitch Ratings will likely boost the inflow of investment.

Despite the global economic slowdown, led by the financial crisis in the Eurozone, the World Bank still forecasts Indonesia will grow by 6.2 percent in 2012. So far the picture has been very rosy.

However, if we delve deeper, Indonesia needs to pay attention to its economic structure. The national output still relies heavily on resource-based products.

Growth has been possible partly due to the booming price of commodities over the last two years. This fact could affect Indonesian economic growth as global commodity prices remain highly volatile.

Also, resource-based industries do not create jobs as much as manufacturing and services do. As revealed by the World Bank Report (Indonesia Economic Quarterly) released last December, Indonesian exports of resource-based manufactures, such as rubber and palm oil, increased significantly between 2003 and 2008. The proportion of resource-based products in total non-oil and gas exports rose from 34 percent in 1995 to 47 percent in 2010.

Some economic experts opine that a resource-based economy will bring fewer transfers of technology as against one based on manufacturing. Further, such an economy does not promote productivity-enhancing structural changes.

The World Bank Report also underlines Indonesia’s low spending (by public and private agencies) on research and development (R&D) with a mere 0.08 percent of GDP in 2009. This is substantially lower than other Asian countries such as Thailand (0.26 percent in 2006), Malaysia (0.63 percent in 2006), China (1.44 percent in 2007), Singapore (2.5 percent in 2007) and South Korea (more than 3 percent in 2007).

Those countries which spend more on R&D also have a robust manufacturing sector and are turning themselves into knowledge-based economies.

From 1990–1996, the Indonesian manufacturing sector (mostly dominated by low-technology products) grew by 12 percent per year, contributing to one-third of Indonesia’s GDP growth. During that period of time Indonesia witnessed average economic growth of 7 percent per annum.

Following the crisis in 1997-1998, the Indonesian manufacturing sector steadily declined. It only started to pick up from 2009 until 2011, when it grew by 5.6 percent, still far below the pre-crisis level.

This growth has been driven by the domestic market with growing demand for manufactured products such as basic metals, food, chemicals and automotive parts.

The World Bank Report shows that developing the manufacturing sector could help create more jobs, higher wages and reduce unemployment.

In the end, it would lead to a larger middle class to serve as a lucrative market for manufactured goods.

Therefore, Indonesia needs to restructure and modernize its economy. The manufacturing sector has to be developed through more comprehensive and generous R&D spending.

Knowing that R&D is quite a risky and expensive endeavor, Indonesia needs to minimize risk by pursuing technology transfers from more advanced economies. This could take place through foreign direct investment (FDI), technology licensing or imports of capital goods.

As long as R&D investment is securely linked to the manufacturing sector, new technology adoption within the Indonesian economic structure can be accelerated.

At this point, the Indonesian Foreign Ministry could lend its services to the country by establishing and delivering scientific and economic diplomacy.

Some Indonesian missions abroad are accredited to countries where hard capital, such as technology, expertise and capital investments or soft capital such as corporate culture, are abundant. Let us take Europe for instance.

Regardless of the fact that some European countries are experiencing an economic slowdown, Europe is still home to advanced and green technology innovations, a large number of private investors, as well as many of the world’s most advanced and profitable companies.

Europe needs Indonesia, and other developing economies, as a source of growth if it is to weather the economic woes within its borders.

By carrying out market intelligence, a link and match role, Indonesian diplomats abroad could gain access to technology and FDI for government agencies as well as the private sector in Indonesia.

On the hard capital side, the Foreign Service could help Indonesian R&D institutions, be they public or private, gain access to R&D institutions abroad.

Diplomats could also help find investors to participate in the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development, provided there are foreseeable profits, investment guarantees, law enforcement, as well as a hospitable tax regime. FDI could bring R&D and expertise to Indonesia.

On the soft capital side, diplomats could also help Indonesian companies get exposure to the professional corporate culture established in many foreign companies, through internships or professional training.

Indonesian State-owned Enterprises (SOEs) are a very significant part of Indonesian economic capitalization (with total assets of around US$ 292.5 billion, roughly 39 percent of GDP in 2010), but as President Yudhoyono has pointed out, these SOEs have not yet contributed to their full capacity due to structural and cultural problems.

That is why they could be slated as targets to be exposed to advanced technology, modern management and FDI. These efforts might help transform those SOEs into world leaders.

Therefore, Indonesian diplomats need to be equipped with sophisticated knowledge on technology and economics through training and education, so that they will be able to play the link and match role.

With a clear and comprehensive strategy based on individual strength and excellence, Indonesian diplomats could become accelerating agents in Indonesian economic development.

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Notice: This opinion article was quoted in an online newspaper, The Jakarta Post, in Jakarta, Indonesia, on February 24, 2012. It is also able to be searched at: www.thejakartapost.com [accessed in Bandung, West Java, Indonesia: 26 February 2012].

The writer is a diplomat. The opinions expressed are personal.

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